How heating oil prices are determined

How heating oil prices are determined

Prices of heating oil are mainly determined by the world price of crude oil. Although some portion of its final price is built up by means of distribution, and despite the fact modern fuel oil often has a certain level of organic fuel, crude oil prices are always the main criterion for it. Oil is a commodity traded daily on stock markets, on most finance-related websites you can get current prices from major world stock exchanges in real time. Although most fuel oil is made of domestic crude, it’s still traded at prices dictated by various events across the globe which determine market trends.

Global conflicts

Major disadvantage of heating oil, which comes from the price of crude lies in the fact that some major oil extraction countries are located along politically troubled areas. The Middle East is most commonly referred to as a troubled area rich in oil. Various terrorist and insurgent groups are constantly seeking to capture areas with oil extraction fields, as they can resell that oil on black markets to fund their activities.

In most cases, the regular armies of these countries, with help of the US Army and other Western allies will manage to keep oil extraction and distribution facilities safe. But stock brokers are very cautious. Once news of a terrorist attack close to a major oil extraction field in Iraq reaches the Wall Street, oil price will explode. The fact that actual oil extraction would most likely remain undisturbed doesn’t help much, stock brokers primarily take risks in their account and use price hikes to mitigate them. Prices will be usually back to normal, but it can last for weeks.

Currently, the oil price sees one of its historic lows, despite the ongoing armed conflicts in Syria, Iraq and Yemen, as well as rather unstable situation in Libya, as armies remain successful in protecting oil fields, pipelines and ports from insurgent attacks.

Supply and Demand

Global economy is continuously facing the convergence effect, which means that less developed countries grow faster, and so does their oil demand. China for example, had only a few million cars on its streets twenty years ago. Now the number exceeds 100 million. Similar things happen in other developing countries as well, playing as a push force for oil price. Speaking of developed nations, there is no more growth in number of cars on their streets, but their oil demand is pushed up by airlines, as people now fly more often than before.

State of the economy

Strength of an economy is defined through a key indicator called purchase parity power (PPP). When a country, or a major part of the world shows signs of recession, the PPP is about to fall, resulting in lower oil demand. Recession may play similar role in oil price determining as aforementioned terrorist attacks – yet here these effects are much stronger and last longer. Most Western countries are now in stagnation. America’s growth is rather slow and is maintained by growth of private sector, while European economy is in trouble because of Greek bailout plan. When recession is around, people start to refrain from oil consumption through less driving and booking less flights.

Since the West still leads the world in oil consumption, these forces play a greater role in global oil consumption and pricing than growth of China and other developing countries, and that explain current low oil prices.

Technological advancement

High efficiency oil consuming equipment, from trucks, locomotives and cars to oil heat furnaces consume less oil for the same amount of effect expected by its users. For example, modern oil furnaces usually have efficiency levels (AFUE) of 90% and more, and households use them to replace their old ones which had efficiency of 70-75%. Motors are also more efficient, so present-day pickup trucks consume the same amount of fuel as mid-size sedans used to burn 10 to 15 years ago, and present-day mid-size sedans consume as much as subcompacts did back then. Airlines replace or overhaul engines making their jets more energy efficient. Various technologies also switch from oil to electric solution, which is the case with cars and locomotives. This all allows people to improve their life, have more heat and more fun without spending more on fuels. Add to that the trend of healthy life. Many people walk or ride bicycle instead of driving shorter distances, or simply eat less than before, and lower food consumption means less working hours for tractors and trucks.

What to Expect

Oil price is just like the weather, it is impossible to forecast it accurately for any term longer than days or weeks. Though political and economic factors are more predictable than armed conflicts in oil rich areas, these data can be used for making long-term estimations.

Latest news is that Iran, another major oil rich country has promised to stop making nuclear weapons in exchange for lifting the oil embargo. First major exports out of Iran should be expected during early 2016. This will definitely push prices low. There are also news of slowing growth in China, high uncertainty in Europe regarding debt of Greece and some other Euro states. This will certainly influence low level oil prices.

Forces which can make oil grow in a foreseeable future is a continuous high economic growth in places such as Africa, India, Southeast Asia and Latin America. Since none of them can have a major stake in global oil consumption any sooner, their effect on oil price trends would be minimal.

Then there’s also the glut in oil that should keep prices low well into 2016.

Seasonality

Seasonality is a factor which applies primarily to heating oil, and it’s one of main reasons why petroleum companies dye it red to tell it from motor diesel fuel. Prices of heating oil always grow during fall and winter, though if crude prices remain this low, oil heat will not grow substantially. Have in mind that crude prices halved over last 12 months and that much less oil goes for heating than for road vehicles and aircraft.